The Solo 401(k) – How to Open A 401k On Your Own in 2022

Being self-employed has many perks, but one of the disadvantages is not having a 401(k) from work. The problem is that the 401(k) is sponsored by an employer, and since a company doesn’t employ you, you won’t have a way to save for retirement, or will you?

Don’t worry! You don’t have to forego retirement savings when you are self-employed, and you need to think of some type of retirement plan. The good news is that there are several options open to you. 

What Options Available for Self-Employed People?

When you are self-employed, you work for yourself. Your hours are more flexible. You have more money and time to do things you want, but you also have a lot of responsibility. Just as you are responsible for your business’s work and administration, so you are responsible for your employee’s retirement plan, and that employee may only be you. So you need to take the time to learn about your financial planning options and decide on what plan you want to use. There are more than a few options available to you. These alternatives include:

  • A solo 401(k) plan: An account similar to a 401(k) but not opened by an employer but by you or your business entity.
  • The Simplified Employee Pension: Similar to a 401(k), you can only contribute up to 20% of your income.
  • The IRA Account: An individual retirement account allows you to save money for retirement in a special account with tax advantages.
  • The Roth IRA: A special type of individual retirement account that offers tax-free growth as you pay taxes upfront on contributions and not after the assets have made gains when you withdraw money after retirement.
  • Taxable Retirement Savings & Investing: This is a retirement account where the contribution is taxed as income, and any capital gains or dividends may also be taxed. 
  • Health Savings Accounts (HSAs): This account is tax-advantaged savings account to help save for medical expenses. It is for people that have a high-deductible insurance plan.

Is A Traditional 401k Account Suitable?

A 401(k) is a retirement savings plan put in place by a company. It is offered to company employees and allows them to save for retirement and to get a tax break when they contribute. As an incentive, employers often match a contributing sum.

All 401(k) plan contributions have a set annual contribution limit. If you are an employee, the amount you decide to contribute is automatically withdrawn from your paycheck and invested in funds that you choose from a list provided by the 401(k) provider.

If you work for a company, want to lower your taxes, save for the future, and retire comfortably, you can use your 401(k). Just inform your employer of the amount you wish to contribute, which is withdrawn automatically from your paycheck.

Is A Solo 401(K) Account The Best Option for Self-Employed?

Saving for retirement is a BIG deal. You should be thinking about it as soon as possible, but if you are self-employed, there is no company to set up your 401(k). You have to do it yourself, which can be a bit confusing, but there is such a thing as a Solo 401(k) where you can have a 401(k) all to yourself. 

However, not all financial institutions offer a solo option. You have to ask your bank, your investment firm, or you can select one like Nabers Solo 401k, which is an interesting option as this investment firm gives you alternative assets like start-ups, cryptocurrencies, private equity, wine, and art.

Determining the amount to invest in a Solo 401(k) is a little more complicated as you’ll need to make your financial plan. To determine your future financial goals, you should ask yourself these questions. Once you have clear answers, you’ll see which plan best fits your needs.

  1. How much do you need to save per year? To get to this amount, consider your expenses and what they will be when you retire. If you aren’t sure about how much you need to set aside, use a retirement savings calculator. You can find one available online. 
  2. Is your company growing? Do you plan on adding employees? How much are you willing to contribute towards their retirement? At some point, it may be more convenient to get in touch with a traditional 401k provider for all employees.

How Much Can I Contribute to A Solo 401(k)?

A solo 401(k) plan can be the right option if you need to save on taxes. The 401(k) allows for contributions both pre-tax and post-tax. If your income is below a certain level and you want to save up to $61,000, with an additional $7,000 if you are over 50, per year, a solo 401(k) makes sense. However, if you have both a business and a job, and your employer offers you a 401(k), your limit is still the same amount, so you can’t double dip and save $61,000 in your work 401(k) and another $61,000 in a solo 401(k). You are only allowed one 401(k).

Even so, if you have a business and want to save for retirement. If you aren’t employed and don’t have an employee 401(k), you can shelter away money and lower your tax bill with a solo 401(k).

It is also important to know that a solo 401K account may imply a few yearly fees, and some accounts may cost as much as $600 to $700 per year to maintain. If you decide to open a 401K, consider two or three options to lower your yearly costs. Our top choices are Fidelity Investments, Charles Schwab, and ETrade. However, if you are looking for a more modern 401K company, that would be Nabers Solo 401K, as they offer flat rate pricing and allow you to invest in any investment like real estate, stocks, gold, or cryptocurrencies, or futures.

If You Work Via a Business Entity, Consider Simple IRA Accounts

If you have registered your business as a business entity, you can opt to open a simple IRA account instead of a 401(k). By doing this, you can save on the yearly fees, and the process is easier to set up.

 As the sponsoring employer or company, you must add up to 2% of the employee’s compensation (your salary). And as an employee, you can contribute pre-tax dollar amounts to your IRA account. However, the IRA does not allow you to save as much as the 401(k). There is a limit of $14,000 or $17,000 if you are over 50. The good news is that you can get additional savings through this plan because it can help you remain in a lower tax bracket. Let’s look at an example:

Suzy is aged 35 and has a salary of $75,000. If she took advantage of the full $6,000 contribution limit, the deduction would drop her to $61,000, which would be a lower tax bracket.

SEP IRA options might also be fine if you have a Business Entity

The SEP IRA could be a great option if you have a business entity. The simplified employee pension (SEP)IRA can be established by any business, including a sole proprietorship. Still, it must be established and funded by the employer’s tax filing deadline, including any extension you might have. So you can set one up for yourself as the employee. It is like the traditional IRA, but you set it up for your business entity and fund your account through the business. The amount your business contributes is tax deductible for the business. The funding limit is large, so you’ll want to check with your state. In general, though, the contribution limit is 25% of the employee’s compensation, or $61,000, and for you as an employee, these contributions are not taxed until you retire.

What options are available for everyone else?

The above options offer retirement saving options for many people, but for some people, neither of these options will work. Sometimes, your business may be too small, or you may be working while running a business. So if you are ineligible, here are a few other options.

The Health Savings Account

OK, so once you have the big stuff out of the way, or when you don’t have enough for a 401(k) or an IRA. You should ensure you have set up a health savings account. These accounts are not widely used, but they are available to everyone. The only requirements are that you have a health insurance policy and be insured with a high deductible, and Medicare or Medicaid must not sponsor this plan.

There is no limit to the contributions you can make to an HSA. These funds go into a savings account that does not pay interest and may have a monthly fee, but the HSA does allow you to take the funds out once you reach $2,000 or $3,000 and invest the funds.

The HSA may not be an option for everyone, as the funds you place here will only be used for medical expenses. However, funds on deposit or spent here are tax-free, saving you money in the short term. Once you have enough in the savings and don’t need it, you can put it back into investments or retirement accounts later.

Funding An Investment Retirement Account (IRA)

An Investment Retirement Account (IRA) is another option. You may make contributions, and some may be deductible from your tax return. The tax from earnings is also tax deferred until you withdraw them in retirement, and when you do that, you may find yourself in a lower tax bracket than you were before you retired, which means you are taxed at a lower rate.

Opening Up A Roth IRA

The Roth IRA works like a regular IRA but has a different taxing method. Rather than contributing tax-free and paying when you withdraw once your investments have made a lot of gains, you pay taxes when you deposit, just like your regular taxes.

The Roth IRA can be an invaluable asset and give you distinct tax advantages in the future. However, it also depends on your financial situation. For instance, Roth IRAs are not necessarily better for you if you are a high-income earner. You may do just as well with a standard IRA.

Another distinct benefit to the Roth IRA is that it doesn’t have a required minimum distribution, or RMD, meaning you won’t be forced to take money out of your IRA when you reach 72. That may not be a problem, but if you plan to set aside a large sum for your heirs or simply want to have it available should you need it, the RMD may put a damper on your plans. With a Roth IRA, there are no RMDs.

Taxable Retirement Saving and Investing Account

Another option, which may be easier, is to use a taxable account but pay little to no taxes on your portfolio, provided you invest according to a plan that minimizes your tax obligations. This type of account allows you to access your funds anytime and does not penalize you like a 401(k) or IRA.

An additional benefit to the taxable account is that you can access your funds in early retirement if you want to try and retire early. These accounts work best if you need to access funds to sustain retirement before your other accounts are available when you reach 65.

The (Limited) Options Available for W2 earners

If this is your situation, you have the really short end of the stick. You are employed, but your employer doesn’t offer a 401(k). You shouldn’t have to open your own 401(k). If you are working for a US company, you should suggest that your employer offer one. If there are more than a few employees, they shouldn’t have a problem setting up a 401(k). Other than that, there is not much you can do except choose one of the above options.

Final Thoughts

Planning your retirement fund doesn’t need to be difficult, not even when you go solo. You can get a Solo 401(k) or other retirement savings option. The important thing is that you don’t go without anything. You can feel secure knowing that you have a savings plan for your retirement, and you can defer some of those taxes if you want.